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HP's New Target: Couch Potatoes

By Ben Elgin Hewlett-Packard, a sprawling tech giant that sells everything from billion-dollar info-tech services to $100 digital cameras, is now seeking a foothold in its customers' living rooms. On Aug. 27, HP (HPQ) unveiled dozens of new consumer-electronics products, from plasma and flat-panel TVs to new digital cameras and printers to HP's branded version of Apple's (AAPL) iPod music player.

Coming on the heels of a disappointing third quarter, in which HP undershot profit estimates by 39%, its consumer-electronics push is coming at a critical time. Chief Executive Carleton S. Fiorina estimates that digital media is a $360 billion market overall and a big opportunity for HP. "[The products] will be good for our bottom line," says Fiorina.

It's also a key piece of Fiorina's broad strategy, and success in consumer electronics will help vindicate her vision. The CEO has long insisted that HP's dominant position in the printing and imaging business, which accounts for three-quarters of profits, would feed other businesses, such as PCs and consumer electronics. If HP can jump from snapping and printing digital photos to become a key developer of digital-entertainment products, many lingering doubts about HP's strategy could be erased.

WRONG MESSAGE? Much skepticism, however, remains about HP's prospects in consumer electronics. Although the HP-branded iPod garnered headlines, most analysts aren't sure how much business this will bring HP. And although Fiorina repeatedly praised her company's innovation when announcing these products, some felt the iPod distribution deal sends the wrong message about HP as a creator of new technology. "It doesn't help much to build confidence in where HP is going," says Mark Stahlman, managing director at boutique brokerage Caris & Co.

Indeed, most analysts reserved their praise for technologies unveiled in the printing and imaging group. HP's latest ink technology, introduced under a new brand dubbed Vivera (see BW Online, 8/27/04, "HP to Shoppers: Think About the Ink"), promises to print photos as much as 40% faster. The inks also boast increased longevity, with fade-resistant prints expected to last as long as 110 years, according to HP.

In addition, HP says the cost of printing photos will drop as low as 29 cents per print for a 4x6. That's significant because it will finally be cheaper to print digital photos at home, instead of taking them to the local drugstore, according to HP. "Some of this stuff is just a lot of noise, but there's a lot of important developments in printers and supplies," says SG Cowen analyst Richard Chu.

"BOOM BOX" FOR MOVIES. Such endeavors are critical in HP's efforts to buttress its cash cow. With many competitors seeking to cut the cost of ink, HP needs to prove its prices are worth it. Dell, for instance, is promising to shake up the market for printers and supplies with low prices, while the market for refilled ink cartridges, often half as expensive as a new HP cartridge, continues to grow.

And that makes HP's challenging drive to expand its cachet from printers to living-room technology an even more crucial element of future growth. Fiorina & Co.'s key thrusts include a digital-entertainment center, which lets users store and manage music, movies, and photos from a single device. HP also displayed its Cinema Digital Projector, which Fiorina describes as a "boom box" for playing movies around the house. In addition, she unveiled the LCD TVs that HP had initially announced in January.

Although much of this technology is also being made and promoted by other companies, HP insists that its efforts to make its products work together easily will separate it from the crowd. For example, the HP-branded iPod can also be used to store digital photos and then be connected to a portable HP printer for quick prints. "We're going from products to experience," says Vyomesh Joshi, the executive vice-president of HP's printing and imaging group.

HP will soon find out if this "experience" will be enough to win millions of back-to-school buyers and early Christmas shoppers. Elgin is a correspondent in BusinessWeek's Silicon Valley bureau

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